What are the reasons for part-time work rise?
HRM 3422
INDUSTRIAL RELATIONS
Week 2
Economic Environment
Outline
? Supply and Demand Model
? Factors that Impact Demand for Labour
? Factors that Impact Supply of Labour
? Labour Market Policy Issues
2
Supply and Demand Model
? Competitive Labour
Market
? Demand for Labour
? Supply of Labour
? Equilibrium Wage in S&D
model
? Competitive Labour Market
?Refers to basic supply and demand model
? Assumptions of Competitive Labour Market
Model
?“Large” number of employers
?Numerous people with homogeneous skills
?Employers are wage takers
? i.e. the wage is set by “the market” not by the individual
employer
?No artificial barriers to entering an occupation
? Why important
?Many (perhaps most) labour markets are not
competitive
?But competitive model is benchmark for comparisons
?Provides starting point for more advanced models
?Ideological importance
4
Supply of Labour
? Supply of labour refers to the number of people
who want to work in any given occupation.
Supply of labour depends on:
?Wage rate in the occupation (total compensation)
?Working conditions
?Amount of training required
?Preferences of employees
? Greater the wage rate, the more people will want
to work in the occupation, other things equal.
? i.e. graphically, the labour supply curve is
upward sloping.
5
The Labour Supply Curve
W
• As the wage rate
increases, more
employees want
to work in the
occupation.
S
$15
$10
L1
L2
L
6
Demand for Labour
? Demand for labour refers to the number of
workers an employer wants to hire in any
occupation. It depends on several factors
including:
?Wage rate
?Technology
?Output of the organization (“sales”)
? An increase in the wage rate will reduce the
amount of labour an employer wants to hire,
other things equal.
? i.e. the demand for labour is downward sloping.
7
The Labour Demand Curve
W
• As the wage rate
increases,
quantity of labour
demanded
decreases.
$15
$10
D
L2
L1
L
8
The Equilibrium Wage Rate
?The equilibrium wage rate is the wage at
which the supply of labour equals the
demand for labour.
?Pressure toward equilibrium wage in a
competitive market.
?No deficient demand unemployment at
equilibrium wage but…
?Frictional unemployment due to turnover
?Structural unemployment due to mismatching
9
Equilibrium Wage in S&D model
?Equilibrium
occurs at the
intersection of the
supply and
demand curves.
W
S
Oversupply
W1
E
We
D
Le
L1
L
• Oversupply of
labour at W1
creates
downward
pressure on wage
10
Factors that Impact
Demand for Labour
?Minimum Wage Policy
?Non-Competitive Labour Markets
?Deindustrialization
Minimum Wage Legislation in Ontario
? Ontario Employment Standards Act specifies a general
minimum wage, which is generally about 40-50% of
average industrial wage.
? Coverage of Ontario minimum wage
?5% of Ontario employees work at minimum wage
?3% of total hours worked
?1.5% of total earnings
? Minimum wage policy is a controversial issue in Canada.
? Variety of approaches have taken by Ontario
governments over the past couple of decades.
12
Ontario Minimum Wage Policy
1995 onwards
? Eight policy periods:
?Over 25 years from 1995 to 2020 there have been 8
distinct policy periods:
1.Conservative Freeze 1995-2002:
?Minimum wage was not increased during 8 years
Conservatives in office in Ontario under Premier Mike
Harris.
2. Annual Increases 2003-2007:
?Ontario Liberal govt increased min wage from
$6.85/hr in 2003 to $8.00/hr in 2007 (i.e. 17% over
four years). Increase determined year by year.
13
3. Pre-determined Increases, 2007-2010:
?In 2007 anti-poverty groups mounted a concerted
campaign to increase the minimum wage to $10/hr.
They argued that at $8/hr an EE working full-time
year round would only earn $16,000/yr, below the
“poverty line.” [50 wks @ 40 hrs/wk = 2000 hrs/yr].
?In 2007 the Ontario govt announced the minimum
wage would increase from $8.00 to $10.25 by 2010,
an increase of 28% over three years.
14
4. Liberal Freeze, 2011-2013:
?The year after the Ontario government announced it’s
three year program of minimum wage increases the
Canadian economy entered a recession caused by
the Global Financial Crisis.
?Minimum wage frozen at $10.25 for 2011, 2012 and
2013
15
5. Catch-up and Keep-Up (2014-2017)
?There was considerable dissatisfaction from both
business and labour communities over the pattern of
substantial increases followed by freezes in the
minimum wage.
?July 2013 Ont govt established a Minimum Wage
Advisory Panel.
?Anti-poverty advocates campaigned to increase
minimum wage to $14/hr. Held several “days of
action” to support campaign.
16
? Ontario Chamber of Commerce advocated increasing
the minimum wage annually by the percentage increase
in CPI to keep the real minimum wage constant (avoid
freezes & large increases).
? Catch-up: In Feb 2014 the Liberal govt passed
legislation to increase the minimum wage from $10.25 to
$11.00 (an increase of 7%) to catch-up for inflation
during the three year freeze.
17
? Keep-up: From 2015 onwards, increases in min wage to
were to be tied to increases in Ontario CPI, as
recommended by Advisory Panel.
? Minimum wage increased to $11.25 in Oct 2015, $11.40
in Oct 2016., and to $11.60 in Oct 2017 (in accord with
increase in CPI).
? However, the Liberal government abandoned the policy
of tying the min wage to the CPI after only three years.
18
6. Changing Workplaces Review (2017-2018)
?May 2017, Ont Govt announced, that following the
Report of the Changing Workplaces Review, the
minimum wage would increase to $15/hr in three
stages.
?Increase from $11.40 to $11.60 in Jan 2017, then to
$14/hr in Jan 2018 (21% increase).
?Also announced increase to $15/hr Jan 2019
(an increase of 7%).
19
7. Conservative Govt Freeze, 2018-2020
?June 2018. Conservative government elected in
Ontario, headed by Premier Doug Ford.
?Announced the increase to $15/hr in Jan 2019
announced by the previous Liberal government was
cancelled .
?Also announced the minimum wage would be frozen
at $14/hr until Oct 2020 (almost 3 years).
8. Conservative Govt, Indexed to CPI, 2020 onwards
?Oct 1, 2020 increased min wage to $14.25/hr
?Current: $15.00
?Oct.1, 2022 $15.50
20
The Real Minimum Wage
? The real minimum wage is defined as the minimum wage
adjusted for changes in the price level.
? The real minimum wage can be calculated by adjusting
the actual (i.e. nominal) minimum wage to the price level
in any chosen base year. I chose 2018.
? E.g. the nominal minimum wage of $6.85/hr in 1995 can
be converted to its value in 2018 dollars by multiplying
$6.85 by the ratio of the Ontario CPI in 2018 to the
Ontario CPI in 1995.
? Real min wage = $6.85 (135.0/86.8) = $10.65.
? Means a wage of $6.85 in 1995 could purchase same
amount of physical goods & services as a wage of
$10.65 in 2018.
21
Rationale for Min Wage
? Reduction of poverty and a more equitable
distribution of income
?i.e. intention is to redistribute income to relatively low
wage minimum wage employees from higher income
employers and/or consumers
? Strong public support for redistribution goals of
minimum wage
?Note that Conservative government did not increase
minimum wage during 8 year term of office, but it also
did not abolish the minimum wage
22
Who Works at Minimum Wages
? Almost half of minimum wage workers in Canada are
teenagers (aged 15 to 19)
? Two-thirds of minimum wage workers are under 25
? Two-thirds of minimum wage workers live with their
parents or another family member
? 60% of minimum wage workers are part-time
23
Distributional Impact of Minimum
Wage: theory
? Two reasons why minimum wage is likely to have small
re-distributional effects:
1. Many people in poverty are not working and so will not
benefit from an increase in the minimum wage.
2. Many employees working at minimum wage are
second or third earners in relatively high income families.
Result is that much of the benefit of a rise in minimum
wage goes to families that are not in the target group.
24
Green (2015)
? Argues that minimum wages may reduce the extent and
depth of poverty, even if it has a minimal effect on the
explicit “poverty rate”.
? “At $10.25 per hour, for example, a single person
working full time still remained below the poverty line, so
the last increase from $8.00 to $10.25 would be unlikely
to have much effect on the poverty rate (though it may
have reduced the depth of poverty for some.” (Green,
2015, p.6)
25
Non-Competitive Labour Markets
?Monopsony
?Institutional Barriers to Supply
?Unions and Labour Supply
26
DEINDUSTRIALIZATION
Refers to shift of employment from manufacturing and other goods
production to the service sector.
70% of employees now in service sector
Concern that unionization rates and wages may be lower and more
unequal in the service sector (“McJobs” is now an entry in the
Oxford Dictionary).
27
Causes of deindustrialization
? Rising living standards has led to an increase in the
consumption of both goods and services, however,
consumers’ preferences for services have increased
faster than their preferences for goods.
? Productivity growth is higher in goods industries than in
service industries which are more labour-intensive and
are less easily replaced by technology.
? Demand for labour in Canadian manufacturing has
declined as production has shifted to countries with
lower labour costs.
28
Deindustrialization: Implications
?Many jobs in the goods sector are highpaying and unionized blue-collar jobs,
whereas many of the service-sector jobs
are lower-paying and often non-union.
?However, there are also high-paying union
jobs in the service sector, eg. Teachers,
pilots, doctors, lawyers, accountants, etc.
?Conclusion: effect of deindustrialization is
mixed
29
Factors that Impact
Supply for Labour
?Women in the Workforce
?Part-time Work
?Non-Standard Work and Precarious Work
?Aging of the Population & Mandatory
Retirement
Women in the Workforce
?Share of women in the labour force has
risen from 34% in 1970 to about 48% in
2018.
?Due to rising labour force participation by
women and a trend toward earlier
retirement by men (declining LFPR).
?Male LFPR = 70% in 2018
?Female LFPR = 61% in 2018
31
Women in LF: Implications
?Implications of rising female LF share for
LR:
?Growing importance of pay & employment
equity
?Sexual harassment, systemic discrimination
?Daycare, job-sharing, maternity leave, pensions
32
Part-time work: definition
Statistics Canada definition of part-time work
? A person who works less than 30 hours per
week at their main job.
? Formerly defined as normally working less than 30
hours at all jobs
? In the 1950s, PT defined as working less than 35
hours
Magnitude of the change
? Part-time employment rate has increased
steadily from about 4% in the mid-1950s to 19%
in 2013 or about one in five employees.
? Generally about 75% of PT is “voluntary”
33
Part-time Work: Reasons for Rise
Part-time work: Implications
? Part-time work is usually compensated at lower
levels even though their productivity is generally
equal to or higher than that of full-timers.
? Lower compensation of part-timers is seen as a
threat to employment and compensation of fulltimers.
? Part-time workers are more difficult to organize.
35
Part-time work: legislation
? Equal Pay for Part-time Employees
? In 2017 the Ontario Liberal Govt passed
legislation Bill 148 (Fair Workplaces, Better Jobs
Act) requiring that part-time employees be paid
equal wage to full-time workers if they were
doing substantially the same work
? Nov 2018, Ontario Conservative govt passed Bill
47 (Making Ontario Open for Business Act)
which repealed Equal Pay for Part-time
employees effective Jan 2019.
36
Non-Standard Work
?Non-standard work includes part-time and
contingent work.
?Contingent work includes casual, term,
contract, temporary and seasonal jobs.
?Provide flexibility in responding to fluctuations in
demand.
?Non-standard work comprises about onethird of the LF
37
Precarious Employment
? Prof on Arif Jetha, UofT School of Public Health,
published an article on Sept 7, 2018 on the
precarious employment “ For millennials,
employment is a public health challenge”
? The following slides on Precarious Employment
are excerpts from his article:
? Note: “Millennials” are the generation born
roughly from 1980 to 2000 (although dates
vary). Also known as Generation Y or Children
of the Baby Boomers. Currently aged 18 to 38
years old.
38
Precarious Employment
?“Research among Canadians shows
employment to be a critical social
determinant of health, partly because
those who earn higher wages have more
access to safe housing, nutritious foods,
social services and medical care.
?Millennials now make up the largest share
of the Canadian workforce and many are
facing precarious working conditions.”
39
Precarious Employment
? “As a society, we have previously assumed that
if young Canadians invest in formal training and
“pay their dues” in poor quality jobs early in their
careers, they will work their way into better
quality employment. A recent report from the
Canadian Centre for Policy Alternatives (CCPA)
suggests a different reality.
? The study, based on a national survey of 1,000
professionals, found that 22 per cent are
working in precarious situations characterized by
contract work, part-time hours, unpredictable
incomes and a lack of paid sick days.”
40
Precarious Employment
? “The hurdles faced by millennials inside and
outside of the workplace can have a “scarring
effect” and can contribute to adverse work
outcomes (such as unemployment, missed work
days, loss of confidence) that extend across
adulthood.
? Prolonged employment in precarious jobs could
also have a substantial impact on health. For
instance, studies indicate that millennials are at
the highest risk for mental health issues, an
outcome that can be exacerbated by those with
lower incomes.”
41
Aging of the Population
? Median age of the working population rising.
? Baby-boomers born between1947-1966
?Boomers reaching “normal” retirement age (65)
between 2012 and 2031.
Implications for of aging LF for LR:
?What do older workers want?
?Concern with pensions, health care, etc
?Promotion opportunities limited
?Mandatory retirement issue increasingly important
?Labour shortage in future?
42
Age Pyramid Canada:
2016 & 1871
?See Text (4th edition) p. 77.
?https://www.statcan.gc.ca/en/sc/video/201
6census_agesex
43
Aging of the Canadian Population
https://www.statcan.gc.ca/eng/sc/video/2016census_agesex
Age pyramids of the population, Canada, 1961, 2011 and 2061
age
100
95
Males
Females
90
85
2011
80
1961
75
2061
70
65
60
55
50
45
40
35
30
25
20
15
10
5
16
14
12
10
8
6
4
2
0
0
0
per thousand
2
4
6
8
10
12
Note: Persons aged 100 and over are included at age 100.
Sources: Statistics Canada. 2010. Population Projections for Canada, Provinces and Territories, 2009 to 2036, catalogue no. 91-520, medium-growth scenario (M1) and Demography Division, Population Estimates Program.
14
16
https://www150.statcan.gc.ca/n1/pub/91-520-x/91-520-x2022001-eng.htm
Mandatory retirement & HRC
? Mandatory retirement (MR) refers to an employer policy
that requires employees to retire at a fixed age, typically
65. There has never been a law forcing people to retire
at 65.
? The Ontario Human Rights Code (HRC) prohibits
discrimination on the basis of age, which would make
MR illegal since it is obviously age discrimination.
? But, up until Dec 2006, the age discrimination provision
in Ontario HRC was subject to a “cap”:
? “age” was defined as meaning an employee
between 18 and 64.
? cap allowed MR at 65 to continue until 2006
46
MR & Canadian Charter of Rights
and Freedoms
? Age discrimination also prohibited under the
Canadian Charter of Rights and Freedoms (the
constitution).
? but the Charter contains a “reasonableness
test”
? i.e. discrimination is allowed if it can be
shown to be “reasonable in a free and
democratic society”
? The Supreme Court of Canada, in 1990 ruled
that the “cap” on the age discrimination
provision in the Ontario HRC was discriminatory,
but it was “reasonable” discrimination.
47
MR & Canadian Charter of Rights
and Freedoms cont’d
? Supreme Court ruling allowed MR to continue in
Canada.
-A political decision whether to prohibit MR in
each province
? The rationale for Supreme Court’s decision was
that abolition of MR might have wide-ranging
impacts on the IR/HR system (such as jobs for
new LF entrants, costs of public pensions,
productivity, etc).
48
Changes to Ontario MR legislation
? The Ontario Human Rights Commission in 2001
recommended that the age cap in the HRC be
removed, which would effectively end MR in
Ontario (A Time for Action: Advancing Human
Rights for Older Ontarians, Ontario HRC, 2001).
? In April 2003 the Ontario Conservative govt
announced they planned to scrap MR if reelected.
? In Dec 2005 the Ontario Liberal govt passed
legislation abolishing MR effective Dec 2006.
? Exemption for bona fide occupational
49
requirement
Labour Market Policy Issues
?Income and Income Distribution
?The Rise and Fall and Rise of Keynesian
Economics
?Government Fiscal Policy During the
COVID Pandemic 2020
Income Concepts
? Employment income (aka earnings)
?Includes wages, salaries, self-employment income
? Market income
?aka factor income or income before transfers
?Employment income plus investment income
? Total income
?Market income plus transfer payments
?Transfer payments include welfare, EI, OAS, etc.
? After-tax income
?Total income minus income tax
51
Frequency Distribution of Income
? Frequency Distribution of income is a graph
showing income on horizontal axis and the
number (or percentage) of families on the
vertical axis
? Income distribution is not a normal distribution.
? Income is highly skewed, even though most
human attributes (height, IQ, etc) are normally
distributed
? Median income below mean income
?For a normal distribution, median = mean).
52
Frequency Distribution of Income
53
AN IMPRESSION OF INEQUALITY OF INCOME
(JAN PEN)
? To give a sense of the inequality in the distribution of
income, Dutch economist Jan Pen used a metaphor in
which income is proportional to height.
?Assumed a person with average income has average
height.
? Imagine a parade in which all people pass by in one hour
? Parade begins with a few people with negative income
?E.g. Businesses with losses, students borrowing to
study,
? Gnomes the size of a matchstick
?E.g. persons working PT
? For the first six minutes (incomes up to $10,000)
marchers are only about 30 cm (i.e. one foot) tall
54
AN IMPRESSION OF INEQUALITY OF INCOME
(JAN PEN)
? After half an hour (median family income of
$55,000) people are about 168cm (i.e. 5’6”) still
below average height (since median is less than
mean)
?E.g. office workers, labourers
?most people below average income.
? last few minutes people are 4 to 5 meters (16 to
18 feet) tall
?E.g. doctors, lawyers,
? last few seconds they are GIANTS with heads in
the clouds
?Height measured in kilometers
55
Quintile, Decile and Vingtile Shares
?Quintile means ordering the population by
income (for example) and dividing it into
five groups of equal size
?Decile means ordering the population by
income and dividing it into ten groups of
equal size
?Vingtile means ordering the population by
income and dividing it into twenty groups
of equal size
56
Example: Quintile Shares
Quintile
Lowest
2nd
3rd
4th
Highest
Before
Transfers
4%
10
dec·ile
16
24
46
Total
Income
6%
11
17
23
43
After Tax
Income
7%
12
17
23
40
Ratio
11.5
7.2
5.7
(5th/1st)
“After-Tax” refers to income taxes only.
57
Measures of Inequality
?The Gini coefficient is the most common
measure of inequality used in the income
distribution literature
?Gini has a more intuitive interpretation
than standard statistical measures such as
variance or coefficient of variation
58
Gini 45 Countries
?Text (IR in Can, 4th edition p. 76, Fig 3.3)
gives Gini Coeffieients for 45 countries
(2016)
?Inequality in Canada is about average for
the group.
?United States has substantially more
inequality than average
? Scandinavian countries have substantially
less inequality than average
59
Change in Gini 1976-2011
?See Banting and Myles (2015) “Framing
the New Inequality: The Politics of Income
Redistribution in Canada” in Income
Inequality: The Canadian Story
?“Inequality in market incomes from earnings
and investments began rising in the early
1980s, surged ahead over the entire 1990s and
then levelled off in the 2000s. The GINI
coefficient rose from .37 to .44, a huge change
in a measure that is difficult to move” (p.3)
60
Changing Impact of Transfers Tax
? According to Banting and Myles (2015, p.4)
? “Strikingly, transfers and taxes completely offset the rise
in the Gini until roughly 1994.
? In the mid-1990s, aided and abetted by cuts to
unemployment insurance and social assistance, the tax
and transfer system… could no longer keep up with
rising inequality. The result was a sharp rise in inequality
in post-tax and post-transfer income … and the GINI
rose from .29 to .32.”
61
Contending “Frames”
? Banting and Myles identify three “contending frames” for
the politics of redistribution, focusing on different points
in the income distribution:
? Poverty
?concern about poverty has been the traditional frame
for viewing the redistribution debate
? The 99/1 Frame
?The 2011 “Occupy” movement focused on the top 1%
of the distribution
? The Middle-Class Frame
?In recent elections political parties have emphasized
policies to benefit the middle class.
62
The Rise and Fall and Rise of
Keynesian Economics
?The economy typically goes through
cycles of booms and recessions.
?Some recessions have lasted for a decade
(e.g. the Great Depression of the 1930s
followed the boom of the 1929s.)
Balanced Budget Policies
?During the 1930s governments followed a
balanced budget policy.
?During a recession government tax
revenue drops because reduced sales and
layoffs cause a reduction in income tax,
sales tax and other forms of revenue.
?In order to balance its budget, a govt has
to cut its spending during a recession.
Balanced Budget Policies
? But this reduction in spending further reduces national
income, employment and sales, causing a further decline
in tax revenue, requiring a further drop in govt spending.
? Conversely, government increases spending in booms
when tax revenue rises.
? In other words, following a balanced budget policy
means that governments amplify any booms and
recessions that occur.
The Rise of Keynesian Economics
? John Maynard Keynes (1935) published a book (The
General Theory of Employment Interest and Prices) that
suggested governments should instead try to reduce
business cycle fluctuations by running deficits in
recessions (i.e. increasing spending and/or reducing
taxes) and surpluses in booms.
? The budget would be balanced over the business cycle.
The Rise of Keynesian Economics
?During the late 1930s governments ran
deficits (the “New Deal” in the U.S.)
?At the beginning of the 1940s most
Western countries ran deficits to finance
war spending
?The economies went to a boom quickly
and seemed to prove that Keynesian
economics “worked”
?The policy is known as counter-cyclical
fiscal policy
The Fall of Keynesian Economics
?During the decades following WWII most
governments adopted the principles of
Keynesian counter-cyclical policy.
?The problem was that governments
enthusiastically embraced the idea of
borrowing and spending in recessions but
were not so keen on restraining spending
and running surpluses in booms when tax
revenues were high.
The Fall of Keynesian Economics
?Governments generally ran large deficits
in booms and smaller deficits or no deficits
in booms with the result that decades of
borrowing resulted in a large national debt.
?By the 1990s interest on the debt
accounted for about one-quarter of govt
spending.
?Keynesian economics became discredited
and governments committed to achieving
a balanced budget.
The Global Financial Crisis
?As a result of the global financial crisis in
2008, unemployment rose dramatically in
many western countries.
?For the OECD countries as a group, the
average unemployment rate increased from 5.9
percent in 2008 to 8.1 percent in 2009.
?In Canada the unemployment rate rose from
6.1 to 8.3 percent
?In the United States it rose from 5.8 to 9.3
percent
The Return to Keynesian Economics
? Governments in the major developed countries met and
agreed to run deficits to limit the severity of the
recession.
? Canadian govt adopted the 2009 Economic Action Plan
which combined income tax reductions with increased
spending on infrastructure, construction, etc.
?These spending programs are generally credited with
reducing the severity of the recession in Canada and
other countries
Economic Recovery 2012-19
? By 2012 Canada was slowly recovering but the
recession was not over. Canadian governments felt they
needed to restrain spending (or increase taxes) to avoid
an unacceptable increase in govt debt.
? During the 2015 election campaign the Liberal Party
indicated that, if elected, they intended to run deficits for
the first three years in power. Unusual for a mainstream
Canadian political party to advocate a deficit. But
succeeded politically.
? Oct 2019 federal election. Conservatives criticizing
Liberals for breaking promise to balance budget by 2018
(even though unemployment rate is low). But govt deficit
not a major issue (yet). Conservatives promising tax
cuts.
Government Fiscal Policy During the COVID
Pandemic 2020
? As you know, when a COVID-19 pandemic was declared
in March 2020, most provincial governments in Canada
imposed a “lockdown” of all non-essential businesses.
? Grocery stores, pharmacies and other essential
businesses were allowed to stay open.
? Employees in non-essential jobs were required to work
from home when possible.
? Employees in many industries such as retail, hospitality
and travel were laid off or had their work hours
drastically reduced.
? The Canadian government responded by introducing a
range of programs, such as CERB (Canadian
Emergency Relief Benefit) to provide income to EEs who
73
lost their incomes.
Government Fiscal Policy During the COVID
Pandemic 2020
? As a result of increased spending and reduced tax revenue in 2020,
the federal government ran a deficit of unprecedented magnitude
(estimated to be about $425 billion).
? Generally there are three ways for the federal government to finance
its spending:
? 1. Raise taxes
? 2. Borrow from the private sector
? 3. Borrow from the Bank of Canada
? Borrowing from the Bank of Canada is an option for the federal
government but not provincial governments.
? Some municipal governments are also prohibited from running
deficits.
? Consider three options for financing federal spending in turn:
74
Government Fiscal Policy During the COVID
Pandemic 2020
?1. Raise taxes
?i.e. follow a balanced budget policy
?Pro: no deficit (or surplus) and no increase in govt
debt
?Con: exacerbates recessions and booms
75
Government Fiscal Policy During the COVID
Pandemic 2020
? 2. Borrow from the private sector
? i.e. sell government bonds to the private sector
? Pro: allows govt to pursue counter-cyclical fiscal policy
? Con: governments tend to run deficits in recessions but not to
run surpluses in booms, resulting in increased debt.
? Govts need to raise taxes in future to pay interest on the
accumulated debt (and perhaps a surplus to pay down debt). If
interest rates are low, then burden of the debt is smaller.
? If the debt gets too large (substantially in excess of one year’s
national income) then credit agencies may doubt govt’s ability to
repay debt and require a higher interest rate on govt bonds,
which exacerbates the problem.
76
Government Fiscal Policy During the COVID
Pandemic 2020
? 3. Borrow from the Bank of Canada
? i.e. Canadian Govt sells bonds to the Bank of Canada. The Bank
of Canada is owned by the Govt of Canada and is the agency
that has the power to issue currency.
? Selling bonds to the Bank of Canada is a way of increasing the
money supply.
? It is sometimes called “printing money” or “quantitative easing” of
the money supply.
? Normally, the money supply is increased gradually to
accommodate increased population, economic growth, and a
target inflation rate of 2% per year.
? Excessive increases in the money supply would normally cause
an increase in inflation.
77
Government Fiscal Policy During the COVID
Pandemic 2020
? During the COVID pandemic, the Govt of
Canada has generally financed it’s increased
spending on income supports by selling bonds
to the Bank of Canada.
? In normal times this would lead to inflation, but
currently inflation is very low because aggregate
consumer and investment spending in the
economy is low due to the depressed economy.
? We are in uncharted territory!
78

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